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Why South Africa’s Stance on Cryptocurrency will Fail

South Africans are, by and large, an entrepreneurial lot, so it’s rather surprising that the country has taken so long to join the global cryptocurrency trading boom. Despite the South African governments' stance on cryptocurrency, several entrepreneurs have relatively recently jumped on board to launch cryptocurrency exchanges that have the potential to create significant (unofficial) wealth for locals.

Officially, Private Crypto Currencies (PPCs*) don’t exist as they’re not recognised as legal tender in South Africa since only the South Africa Reserve Bank (SARB) is allowed to issue legal tender. However, seeing as there are no (specific) laws or regulations that govern the use of PCCs in South Africa at present, these instruments can be traded (bought and sold) through exchanges**, even though they are not defined as securities in terms of the Financial Markets Act (19 of 2012). Consequently, users, traders or intermediaries of PCCs are not afforded legal protection or recourse as these activities are performed at the users' sole risk.

Government institutions such as the South African Reserve Bank (SARB), the Financial Sector Conduct Authority (FSCA), the Financial Intelligence Centre (FIC), the South African Revenue Service (SARS) and National Treasury are monitoring developments with a view to regulating cryptocurrencies and tokens* through policy frameworks.

Meanwhile, the SARS has issued its stance on the tax treatment of cryptocurrencies, which expects taxpayers to declare cryptocurrency gains or losses as part of their taxable income. Whilst not constituting cash, SARS claims that cryptocurrencies can be valued to ascertain “an amount received or accrued as envisaged in the definition of ‘gross income’ in the Act. Alternatively, such gains may be regarded as capital in nature” or even “regarded as a barter transaction.” Taxpayers are, however, “entitled to claim expenses associated with their cryptocurrency accruals or receipts”a rather bizarre ‘entitlement’ considering that PCCs don’t officially exist.

An attempt was made in April 2018 by the ‘The Intergovernmental FinTech Working Group’ to inform the aforementioned bureaucracies on cryptocurrency regulations and policy frameworks. The report concludes that blockchain technology regulations would quickly become obsolete due to the rapid pace at which technology is evolving.

As a participant in the Fintech workshop, the South African Financial Blockchain Consortium (SAFBC) articulated some of the benefits of developing a blockchain ecosystem. These include improved convenience and efficiency, a decrease in the cost of transfers, and safety and privacy protection.

Ironically, SAFBCs members are predominantly comprised of banks and financial intermediaries — the very institutions whose interests would best be served through a regulatory environment.

However, attempts by Governments or large institutions to control cryptocurrencies would ultimately fail, seeing as the cryptocurrency market is owned by no-one. Banks could, of course, create their own cryptocurrency mining*** but it would have to be a closed system, and therefore, the entire process would be completely different to how cryptocurrencies work in the open-source tech world.

According to CoinDesk, Fiat**** currencies (rands, dollars, euros, yen, etc.) have an unlimited supply — central banks (like the SARB) can issue as many as they want, and can attempt to manipulate a currency’s value relative to others. Holders of the currency (and especially South African citizens with little alternative) bear the cost.

With bitcoin, on the other hand, the supply is tightly controlled by the underlying algorithm. A small number of new bitcoins trickle out every hour and will continue to do so at a diminishing rate until a maximum of 21 million has been reached. This makes bitcoin more attractive as an asset — in theory if demand grows and the supply remains the same, the value will increase.

Getting back to my intro regarding recently launched cryptocurrency exchanges for South Africans, I found CoinDirect (launched in June 2018) and iceCUBED (launched in 2013) to be worthy of mention. I won’t go into the merits of each — there’s simply too much sales blurb to be contained in this article, so go ahead, check them out for yourself.

As an interesting aside, while researching this post I also stumbled across an article in which the writer claims that South African comedian Trevor Noah has “…used his rise to international fame as a platform to give back to his fellow South Africans. His $25million (R340million) investment into a wealth system called Crypto Revolution is making average South Africans very rich, very fast.”

Following the link from the often-cited ‘BitcoinRevolution’ and attracted by the “EXCLUSIVE OFFER FOR TRADERS IN SOUTH AFRICA” masthead prompt along with rotating flash banner citing that so-and-so “just made R817 -R1294 — R2764!” Talk about overkill! I’ve no idea if this is a legitimate offer or just a ‘fake news’ joke, but I was immediately put off by their urgency tactic with countdown clock claiming that you only have a couple of minutes to register and “become the next millionaire…”

Of course, South Africa’s unregulated cryptocurrency environment does open itself to fraudulent practices. A recent investigation into alleged cryptocurrency investment fraud claims that over R1 billion ($80.4 million) in losses affected 28,000 ‘investors’. The alleged scam encouraged ‘agents’ to invest with promises of 2 per cent interest per day, 14 per cent per week and ultimately 50 per cent per month.

But then that’s the nature of free-market economies — there will always be winners and losers — and that’s how it should be.

  • *PPCs are encryption techniques used to issue units of crypto instruments. The units generated are seen as tokens which can be used as a ‘currency’ such as bitcoin, ether or litecoin.
  • ** Exchanges are essentially markets for cryptocurrencies where investors can exchange local currency for a cryptocurrency (or vice versa).
  • *** Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. By verifying these transactions the “miner” is rewarded with ownership of new coins which become part of the networked ledger.
  • ****Fiat is a currency without intrinsic value that has been established as money, often by government regulation, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made.

Travel & Motoring Journalist specialising in Africa.

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